Nadine Chakar, Head of State Street Digital and Global Markets, said that in the next year, she’d like to see regulatory “clarity and who’s going to regulate this sector”. She was speaking today during an online debate hosted by Funds Europe that highlighted blockchain’s potential to transform financial market infrastructure.
The high quality discussion highlighted a number of important issues in the blockchain and cryptocurrency sectors, including:
- blockchain and DeFi are not just niche investments. The technology represents the future of financial infrastructure
- some incumbents see themselves at a disadvantage because they have to be compliant, but crypto firms aren’t
- the transparency offered by blockchain could be harnessed to morph how financial companies are regulated
- incumbents such as State Street need to start with a clean sheet.
Blockchain and the future of finance
Lex Sokolin of blockchain firm ConsenSys tried to move the conversation away from talking about cryptocurrency as purely an investment theme.
“Finance and financial products and the movement of value in all ways, from money to trading to investing and insurance and so on, there is now an internet for this,” said Sokolin, saying “that is rearchitecting how we pay, how we invest.”
He continued, “It’s like thinking about what does e-commerce mean for commerce? Or what does the internet mean for advertising? It’s not just a new type of advertising. It’s the seeds for all of the stuff to come.”
The regulatory question mark
At which point, Jeroen van Oerle, from Swiss private bank Lombard Odier investment management, said, “The only difference is this is a super highly regulated industry.” Which he believes puts a big question mark over the cryptocurrency sector.
Van Oerle highlighted that regulations result from past corrupt practices in equity and other markets, including boiler room scams and pump and dump schemes observed in crypto today. And that investors need protection from these practices.
He pointed to complying with regulations creating a bifurcated market. If traditional asset managers want to tokenize an asset, they need to create a special purpose vehicle, be audited and go through an IPO-like process.
“Competition between traditional financials and these new types of firms is actually not fair at this point in time,” said van Oerle, provoking a smile from Sokolin.
Adam Belding, CTO at fund administration platform Calastone, responded that blockchain’s transparency could be part of the solution. Potentially regulators could incorporate this transparency into regulations.
He has a point. For example, with crypto lending platforms, the comparatively opaque centralized platforms are arguably higher risk than some of the established decentralized (DeFi) lenders. That’s because the crypto community effectively audits the DeFi lenders even if they’re not risk-free. The lower interest rates offered by established DeFi lenders versus centralized lenders reflect this risk differential.
However, Belding also noted that crypto attracts cowboys, which has nothing to do with the technology. “It’s just because people who are nefarious tend to flock to places where they think they can exploit and make money illegally,” he said.
While the technology might offer some of the answers, van Oerle noted that incumbents are not starting with a clean sheet. State Street’s Chakar disagreed.
State Street says it’s starting from scratch
Chakar said there’s a need to rethink the foundations of the financial ecosystem fundamentally. “I am looking at a new digital bank. I’m starting from scratch,” she said.
“I’m not taking the old, I’m not putting a brush of paint on it and saying here we are, we’re digital. What I am doing is building a brand new tech stack that’s going to allow us to better compete and support people like yourselves.”
She said the way she did her job in the past would disappear. She believes that crypto will trickle through and at some point morph and become part of the mainstream. “That will take time,” she said. And there’s a lot of education still needed with boards, regulators and clients.
“I think it will be a fun ride if we can be super clear what we’re trying to do,” said Chakar. “I think right now, people are just jumping into the fray without really understanding the implications. For people like me that deal with market infrastructure, that all is changing. All of that.”
During the discussion, Chakar revealed that State Street is a client of ConsenSys as well as other consultants.
When the panel was asked what they’d like to see in the next year, State Street and Lombard Odier chose regulatory clarity. Calastone’s Belding hopes to see a real use case that starts to move from the traditional into the newer space in a genuine way. And ConsenSys plugged one its solutions.